Insights Paper | COVID-19 Bulletin 1 – Can you cancel your contract?

Insights Paper | COVID-19 Bulletin 1 – Can you cancel your contract?

What contractual outcomes flow from the declaration of a pandemic by the World Health Organisation and the directives of governments to prevent travel or gatherings of people?

As a first step, does the contract contain an express 'force majeure' rule to a party's benefit?

A force majeure rule covers events or circumstances not within the control of the affected party (such as acts of God, war) and which they cannot reasonably prevent or overcome.

If yes, the rule usually suspends performance of the affected party's contractual obligations for the duration of the force majeure, but does not extend the period of the contract nor entitle either party to terminate the contract.

Variations on force majeure rules are possible, so one needs to examine the rule as it is written in the contract.

Next, if a government directive having the force of law makes it impossible for you to comply with your contract temporarily, then a force majeure rule (if any) in the contract likely applies.

But if a government directive having the force of law makes it impossible for you to comply with your contract permanently then the contract is likely ‘frustrated’ (terminated) - whether or not there is a force majeure rule in the contract.

Frustration of contracts is covered by a contract law doctrine, supplemented by the Frustrated Contracts Act 1988 (SA).  If a contract is frustrated, the Act provides a means for a Court to apportion the losses between the parties to the terminated contract, if the parties cannot themselves agree on the apportionment.

So, at this point your steps have been:

• is there a force majeure rule in the contract?
• does a binding government directive bar contractual performance:
  • temporarily (activating the force majeure rule, if any, and suspending performance)
  • permanently (frustrating and terminating the contract)?

​The nature and wording of the contract, and the scope and expected duration of a relevant government directive are all critical to the legal outcomes.

You should seek legal advice specific to the circumstances, because if you get it wrong the counterparty would have the right to sue you for damages for wrongful breach / termination of the contract.

We can help.